Thursday | February 09, 2012
You Don’t Need Much Money to Make Money
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By
Vita Nelson
10 January 2008
Building wealth DRIP by DRIP
Investors usually start with a bundle and hope to make it bigger. With direct investment plans, also known as dividend reinvestment plans (or DRIPs), you begin with next to nothing and you can end up with a bundle. DRIPs allow individuals to invest cash-even small amounts, perhaps $25 or $50-directly through a company without paying brokers’ fees or commissions. These plans are offered by about 1,300 companies–among them some of the bluest of the blue chips.
Why you haven’t heard about DRIPs before
There is a reason why DRIPs have been called "Wall Street’s best kept secret." You haven’t heard about them because companies can’t advertise their DRIPs (by law). And you won’t hear about them from brokers and fund managers because they can’t sock you with big fees and commissions if you buy stock directly from a company. SEC rules make it difficult for companies to let the "secret" out to prospective investors. But some of the best companies in America–Coca Cola, Intel, Motorola, 3M, Exxon, Johnson & Johnson, Black & Decker, to name a few, have been offering DRIPs for years.
Why you should be interested in DRIPs
There are no fees or commission for purchases of stock through many DRIPs, so it becomes feasible to routinely make small cash investments. More than 700 of the 1,200 DRIPs we follow at our website, directinvesting.com, don’t charge any fees, or at least only minimal amounts. Check the "no fee" box when you "select" DRIP stocks at our website to choose among companies that offer no-fee or low-fee DRIPs.
Since you can open an account with as little as a single share of stock, you can immediately establish a well-diversified portfolio of ten (or even 20) different companies. What’s more, many of these companies accept subsequent investments of as little as $10 to $25. By making these cash investments and automatically reinvesting the dividends, you can build substantial wealth to fortify your future with as little as $100 to $250 of disposable cash each month.
And there’s a still more valuable benefit you’ll reap by investing through DRIP accounts.
You will win no matter which way the market goes
The current market is extremely volatile. One day the Dow Jones Industrial Average is up hundreds of points and the next day it is down. It’s hard to know when to commit to a stock. DRIPs solve that problem. With DRIPs, you can invest on a dollar-cost averaging basis. That is, you make regular investments to buy shares at a variety of price points. When the market is up, your investment will buy fewer shares, and when the market is down, your regular investment will buy more shares. Dollar-cost averaging is a great risk-reducing strategy that basically ensures that you will buy more shares at the lower prices.
Say you want to invest $5,000 a year. Every quarter, you might send $125 to each of ten companies–representing ten different industries. Over time, you will have accumulated shares at prices that are less than their average market prices during the period of your investing. How could your shares end up costing you even less than the average market price at the time? The answer is that your fixed dollar investments will have purchased more shares when prices were low and fewer when they were high. Therefore, more of your shares will have been purchased at the lower prices. In effect, you’re making the market fluctuations work for you.
The bottom line is that you are virtually assured of being a successful investor when you employ a long-term strategy of investing regularly in a diversified portfolio of high-quality stocks on a dollar-cost averaging basis.
Why even a small fee makes a big difference
Can a relatively small fee have a significant impact on your investment results? In a word, YES. Take the stock of a great company like Coca-Cola. Imagine what would have happened if Coca-Cola’s transfer agent had adopted a transaction fee of $5 ten years ago, and an investor had been sending in $50 a month…this investment would total $6,000 over the ten-year period. That $5 fee on each investment ($600 over the period), would actually have cost the investor $3,202-or more than half of his or her $6,000 investment! How so? Instead of accumulating 480 shares worth $32,017, the investor would have amassed fewer than 432 shares worth $28,815.
If you’d like to learn more about how you can find and enroll in DRIPs, please visit www.directinvesting.com.
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